As heir awaits verdict, Samsung could face long-term risks

Aug 08, 2017, 09:00 am

By AsiaToday reporters Kim Min-soo & Bae Ji-yoon

A special prosecutors' team led by Park Young-soo demanded 12-year jail term for Lee Jae-yong, vice chairman and heir apparent to Samsung Group, after 53 hearings. As a result, the court will give its final ruling on Lee on August 25 at 2:30 pm. Based on the court's final decision, the debate between the two sides that lasted for 122 days since the first trial on Apr. 7 will finally reach an end. If the court finds Lee guilty, Lee's "in-jail management" will continue, causing a disruption in the company's large scale M&As.

According to the financial circles on Monday, Samsung's concerns over its heir's long-term absence are rising as special prosecutors are seeking a 12-year sentence for Lee. This is because if a top decision maker continues to be absent, the management activities that should be carried out at the right moment can be postponed indefinitely.

Experts say that Samsung's current management system will minimize short-term damage, but it will have a negative impact on earnings in the long term, probably after five to ten years.

"Samsung achieved record-breaking performance in the first and second quarters because of it conducted important investments in a timely manner before," said Lee Kyung-mook, the Seoul National University professor. "The current performance is based on judgments made by its leader in the past. So there may be problems in performance after five to ten years."

An executive from the former Future Strategy Office said, "We will have to follow the court's decision, but if a prison sentence is imposed, mid to long term strategy will be definitely absent." He added, "The company has been working as other executives have been filling in for Lee's role for the last ten months. But the company will surely be in trouble if Lee's management guide no longer exists."

Samsung has a system where its management specialists of each affiliate have no right to make decisions on large-scale investments or M&As and must be relied on the judgment of the head. Therefore, the vice chairman has always been directly involved in important decisions for the future of the company, such as the acquisition of Harman, recruitment of S-grade talent, and more.

"If vice chairman Lee is given a lengthy sentence, his long absence as the final decision maker could shrink the role of the company," said a Korean corporate structure specialist who asked for anonymity.

In fact, Samsung has been quick to pick up various global tech firms in the IoT, AI, clouding, mobile payment fields since 2014. However, it has recently not been able to go out to do large-scale M&As with Harman as its last takeover at the end of last year. In particular, Samsung's global network to create synergies with Harman has shrunk after Lee was arrested in February and lost board seat at Exor, a holding company of Fiat Chrysler Automobiles (FCA).